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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to          

Commission File No. 0-19842

PolyMedica Corporation

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]

     As of October 31, 2003, there were 25,556,171 shares of the registrant’s Common Stock issued and outstanding and an additional 320 shares held in treasury.

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POLYMEDICA CORPORATION
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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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PolyMedica Corporation
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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PolyMedica Corporation
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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PolyMedica Corporation
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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PolyMedica Corporation
Notes to Consolidated Financial Statements
(Unaudited)

1.

Basis of Presentation

     Company

     PolyMedica Corporation and its subsidiaries (“PolyMedica”) is a leading provider of direct-to-consumer medical products, conducting business through its Liberty Diabetes, Liberty Respiratory, and Pharmaceuticals segments.

     Accounting

     The unaudited consolidated financial statements included herein have been prepared by PolyMedica pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of interim period results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.

     The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. It is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003 and our unaudited consolidated financial statements included in our Quarterly Report on Form 10-Q for the period ended June 30, 2003.

     The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Estimates and judgments are used for, including, but not limited to, determination of appropriate Medicare reimbursement rates, the allowances for doubtful accounts and sales allowances, valuation of inventory, goodwill, direct-response advertising, accrued expenses, accruals for Medicare adjustments, uncertainties that management determines are estimable and probable, and depreciation and amortization. Actual results could differ from those estimates.

     On September 5, 2003, PolyMedica’s Board of Directors (the “Board”) declared a two-for-one split of PolyMedica’s common stock, payable on September 29, 2003. The two-for-one stock split was effected in the form of a 100% stock dividend paid to shareholders of record as of the close of business on September 19, 2003. This resulted in the new issuance of 11.82 million shares of common stock plus the issuance of 854,000 shares held in treasury together with a decrease in additional paid-in capital and an increase in treasury stock equivalent to the cost value of the treasury shares issued and a decrease in additional paid-in capital equivalent to the par value of the newly issued shares. All share and per share amounts have been restated to reflect the retroactive effect of the stock split, except for PolyMedica’s capitalization.

     Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current period Form 10-Q presentation.

2.

Revenue Recognition and Accounts Receivable

     We recognize revenue related to product sales to customers who have placed orders, upon shipment, provided that risk of loss has passed to the customer and we have received and verified the required written forms, if applicable, to bill Medicare, other third-party payers, and customers. We record revenue at the amounts expected to be collected from Medicare, other third-party payers, and directly from customers. As a result, our contractual allowances are immaterial. Revenue recognition is delayed for product shipments for which we have not yet received the required written forms, until the period in which those documents are collected and verified.

     Revenue for Medicare reimbursement is calculated based on government-determined reimbursement prices for

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Medicare-covered items. The reimbursements that Medicare pays us are subject to review by appropriate government regulators. Medicare reimburses at 80% of the government-determined reimbursement prices for reimbursable supplies and we bill the remaining balance to either third-party payers or directly to customers.

     Approximately $70.86 million and $60.56 million of net revenues for the three months ended September 30, 2003 and 2002, respectively, were reimbursable by Medicare for products provided to Medicare beneficiaries. Approximately $138.80 million and $117.46 million of net revenues for the six months ended September 30, 2003 and 2002, respectively, were reimbursable by Medicare for products provided to Medicare beneficiaries.

     The valuation of accounts receivable is based upon the credit-worthiness of customers and third-party payers as well as our historical collection experience. Allowances for doubtful accounts are recorded as a selling, general and administrative expense for estimated amounts expected to be uncollectible from third-party payers and customers. We base our estimates on our historical collection and write-off experience, current trends, credit policy, and on our analysis of accounts receivable by aging category.

     Sales allowances are recorded for estimated product returns as well as estimated claim denials, as a reduction of revenue. We analyze sales allowances using historical data adjusted for significant changes in volume, customer demographics, and business conditions. These allowances are adjusted to reflect actual returns and claim denials. During the three months ended September 30, 2003 and 2002, we provided for sales returns and allowances at a rate of approximately 4.3% and 4.9% of gross revenues, respectively. During each of the six months ended September 30, 2003 and 2002, we provided for sales returns and allowances at a rate of approximately 4.6% of gross revenues.

     Our accounts receivable are generally due from Medicare, private insurance companies, Medicaid and our customers. The collection process is time consuming and complex and typically involves the submission of claims to multiple payers whose payment of claims may be contingent upon the payment of another payer. As a result, our collection efforts may be active up to 1 1/2 years from the initial billing date. In accordance with applicable regulatory requirements, we make reasonable and appropriate efforts to collect our accounts receivable, including deductible and copayment amounts, in a consistent manner for all payer classes. During the three months ended September 30, 2003 and 2002, we provided for allowances for doubtful accounts at a rate of approximately 5.4% and 7.5% of net revenues, respectively. During the six months ended September 30, 2003 and 2002, we provided for allowances for doubtful accounts at a rate of approximately 5.6% and 7.4% of net revenues, respectively.

     Accounts receivable allowances consist of an allowance for doubtful accounts, an allowance for product returns, and other sales allowances. As of September 30 and March 31, 2003, accounts receivable allowances were $26.50 million and $22.56 million, respectively, or 34.9% and 26.9% of gross accounts receivable, respectively.

3.

Inventories

     Inventories consist of the following:

     Due to the medical nature of the products we provide, customers sometimes request supplies before we have received the required written documents, if applicable, to bill Medicare, other third-party payers and customers. Because we do not recognize revenue until we have received and verified such documents, included in inventories as of September 30 and March 31, 2003, is $2.08 million and $2.57 million, respectively, of inventory shipped to customers for which we have received an order but have not yet received the required written documents, if applicable, to bill Medicare, other third-party payers, and customers and recognize revenue.

4.

Goodwill and Other Intangible Assets

     In July 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that ratable amortization of goodwill and certain intangible assets be replaced with periodic impairment tests of the goodwill and that other intangible assets be amortized over their useful lives unless these lives are determined to be indefinite. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and thus was adopted by PolyMedica on April 1, 2002.

     The first step of the transitional impairment test was completed in the quarter ended September 30, 2002, which resulted in the determination that the carrying value of the net assets related to our PolyMedica Pharmaceuticals (U.S.A.), Inc. and PolyMedica Healthcare, Inc. reporting units, included in our Pharmaceuticals segment, exceeded their fair value. As a result, we performed the second step of the transitional impairment test in the quarter ended December 31, 2002, to measure the amount of the impairment loss, in which we compared the implied fair value of the goodwill in these two reporting units with the carrying amount of the goodwill. We determined that the carrying value of the goodwill for these reporting units exceeded the implied fair value of that goodwill by $23.80 million. We recorded a $23.80 million ($14.62 million net of taxes) impairment loss related to these reporting units as a cumulative effect of a change in accounting principle retroactive to April 1, 2002.

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     Goodwill included in the PolyMedica Pharmaceuticals (U.S.A.), Inc. and PolyMedica Healthcare, Inc. reporting units is a result of PolyMedica’s acquisition of an Alcon urological product line, including over-the-counter and prescription urology products, in December 1992. Net of the impairment loss, the remaining goodwill related to these reporting units as of September 30 and March 31, 2003 was $1.00 million. Including the amount of goodwill recorded in our Liberty Diabetes segment, which was not considered to be impaired under our transitional impairment test, PolyMedica’s total goodwill as of September 30 and March 31, 2003 was $5.95 million.

     We are required to perform impairment tests under SFAS No. 142 annually and whenever events or changes in circumstance suggest that the carrying value of an asset may not be recoverable and record any impairment as a cost of continuing operations.

     We have three reporting units with goodwill: Liberty Medical Supply, Inc. (“Liberty Medical”), included in the Liberty Diabetes reporting segment, and PolyMedica Pharmaceuticals (U.S.A.), Inc. and PolyMedica Healthcare, Inc., both included in the Pharmaceuticals reporting segment. The carrying amounts of goodwill and intangible assets, excluding direct-response advertising, as of September 30 and March 31, 2003, by reportable segment, were as follows:

     In the quarter ended September 30, 2003, we purchased a customer list, consisting primarily of diabetes patients, for approximately $212,000, from a small healthcare company. We purchased this list in an effort to expand our customer base through means other than direct-response advertising. We will amortize the cost of the customer list to selling, general and administrative expenses on an accelerated basis during the first two years of a four-year period, such that 55% of the cost is expensed after two years from the date of acquisition and the remaining 45% is expensed on a straight-line basis over the next two years, identical to our accounting treatment of direct-response advertising for our Liberty Diabetes segment.

     Amortization expense for intangible assets was approximately $48,000 and $184,000 for the three months ended September 30, 2003 and 2002, respectively, and approximately $113,000 and $368,000 for the six months ended September 30, 2003 and 2002, respectively. As of September 30, 2003, amortization expense on existing intangibles for the remainder of fiscal 2004 and the next four fiscal years is as follows (table in thousands):

5.

Direct-Response Advertising

     In accordance with Statement of Position 93-7 (“SOP 93-7”), direct-response advertising and associated costs for our diabetes supplies and related products, included in the Liberty Diabetes segment, for the periods presented are capitalized and amortized to selling, general and administrative expenses on an accelerated basis during the first two years of a four-year period. The amortization rate is such that 55% of such costs are expensed after two years from the

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date they are incurred, and the remaining 45% is expensed on a straight-line basis over the next two years. Management assesses the realizability of the amounts of direct-response advertising costs reported as assets at each balance sheet date by comparing the carrying amounts of such assets to the probable remaining future net cash flows expected to result directly from such advertising. Advertising that does not meet the capitalization requirements of SOP 93-7 is expensed in the current period.

     Direct-response advertising and related costs for our respiratory supplies, included in the Liberty Respiratory segment, for all periods presented are capitalized and amortized to selling, general and administrative expenses on a straight-line basis over a two-year period.

     Any change in existing accounting rules or a business change that impacts expected net cash flows or that shortens the period over which such net cash flows are estimated to be realized, currently four years for our diabetes products and two years for our respiratory supplies, could result in accelerated charges against our earnings. In addition, new or different marketing initiatives that may not qualify for direct-response advertising could result in accelerated charges against our earnings.

     On September 4, 2003, we announced that we had concluded discussions with the SEC regarding our capitalization of advertising costs under the direct-response advertising exception in SOP 93-7, and that we would continue to capitalize these costs related to the acquisition of new customers, rather than expensing these costs as incurred. Accordingly, we will not restate our historical financial statements, the possibility of which was discussed in previous SEC filings.

     In accordance with SOP 93-7, we recorded the following activity related to our direct-response advertising asset for the periods presented:

6.

New Accounting Pronouncements

     In May 2003, the FASB issued SFAS No. 150, “Accounting For Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, which establishes standards for how an issuer of financial instruments classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on a fixed monetary amount known at inception, variations in something other than the fair value of the issuer’s equity shares or variations inversely related to changes in the fair value of the issuer’s equity shares. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150, as required, on July 1, 2003. The adoption of this statement has not had a material impact on our financial position or results of operations.

     In December 2002, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). In general, a variable interest entity is a corporation, partnership, trust or other legal structure used for business purposes that either (a) does not have equity investors with characteristics of a controlling financial interest or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. FIN 46 requires a

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variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. Additionally, companies with significant investments in variable interest entities, even if not required to consolidate the variable interest entity, have enhanced disclosure requirements. FIN 46 is effective immediately for certain disclosure requirements and variable interest entities created after January 31, 2003 and is effective for periods beginning after December 15, 2003 for variable interest entities created before February 1, 2003. The adoption of this statement is not expected to have a material impact on our financial position or results of operations.

7.

Accrued Expenses

     Accrued expenses consist of the following:

     Amounts reserved for overpayments by Medicare and others represent amounts due to Medicare and related amounts due to insurers and Medicare beneficiaries that arise in the normal course of business as well as those related to a change in interpretation of the reimbursement formula for albuterol and ipratropium combinations used in our Liberty Respiratory segment. When we established the reserve for albuterol and ipratropium combinations in the fiscal year ended March 31, 2002, $5.03 million was charged to selling, general and administrative expenses for billing adjustments prior to July 1, 2001 and $823,000 represented billing adjustments related to the quarter ended September 30, 2001. In the quarter ended September 30, 2002, we recorded a benefit of $2.22 million related to a reduction in this reserve following a favorable determination by one of the four Medicare carriers that our original method of billing for albuterol and ipratropium combinations was proper.

     The government’s Medicare regulations are complex and sometimes subjective and therefore may require management’s interpretation. Accruals for overpayments by Medicare and others also occur in the normal course of business when, based on our assessment of the facts and circumstances, we believe that the amounts due are probable and estimable.

8.

Commitments and Contingencies

     Our compliance with Medicare regulations may be reviewed by federal or state agencies, including the Department of Health and Human Services’ Office of Inspector General (“OIG”), the Department of Justice (“DOJ”), and the United States Food and Drug Administration (“FDA”). The U.S. Attorney’s Office for the Southern District of Florida, with the assistance of the Federal Bureau of Investigation (“FBI”) and OIG, is investigating allegations of healthcare fraud, improper revenue recognition and obstruction of justice by Liberty Medical and Liberty Home Pharmacy Corporation (“Liberty Home Pharmacy”). Both civil and criminal investigations are being conducted. We are cooperating with the investigations. Since July 1, 2001 we have spent approximately $10.58 million on outside legal and accounting fees primarily preparing for and responding to the investigations and the lawsuits described below. This work has been conducted under the overall direction of the Oversight Committee, a special Board committee comprised of three non-employee directors, which was established to oversee our response to the investigations and the related litigation.

     We are party to the following additional legal proceedings:

     –           Class Action Lawsuit. We are a defendant in a purported class action lawsuit in the United States District Court for the District of Massachusetts against PolyMedica, Steven J. Lee, PolyMedica’s former Chief Executive Officer

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and Chairman of the Board, Eric G. Walters, former Executive Vice President and Clerk of PolyMedica, and Warren K. Trowbridge, President of Liberty Healthcare Group, Inc. and a Senior Vice President of PolyMedica, filed on behalf of purchasers of our common stock. The lawsuit seeks an unspecified amount of damages, attorneys’ fees and costs and claims violations of Sections 10(b), 10b-5, and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), alleging various statements were misleading with respect to our revenue and earnings based on an alleged scheme to produce fictitious sales. The complaint was originally filed November 27, 2000, and consolidated with a virtually identical later-filed complaint on July 30, 2001, under the caption In re: PolyMedica Corp. Securities Litigation, Civ. Action No. 00-12426-REK. A consolidated amended complaint was filed on October 9, 2001, asserting claims on behalf of a putative class of purchasers of PolyMedica stock between October 26, 1998 and August 21, 2001. The Court denied the defendants’ motion to dismiss the consolidated complaint on May 10, 2002. On July 30, 2001, the Court granted the plaintiffs’ motion to consolidate the complaints under the caption In re: PolyMedica Corp. Securities Litigation, Civ. Action No. 00-12426-REK. The case is currently in discovery. We believe that we have meritorious defenses to the claims made in the consolidated amended complaint and intend to contest the claims vigorously. We are unable to express an opinion as to the likely outcome of this litigation.

     –           Derivative Complaint. On August 9, 2001, a plaintiff filed a purported derivative action in Massachusetts Superior Court for Middlesex County against our Board. At least three virtually identical derivative actions were subsequently filed in Massachusetts Superior Court. On October 11, 2001, the Court granted plaintiffs’ motion to consolidate the derivative actions under the caption In re: PolyMedica Corp. Shareholder Derivative Litigation, Civ. Action No. 01-3446 and the plaintiffs subsequently filed a consolidated derivative complaint, alleging that the defendants breached their fiduciary duties by, among other things, failing to exercise reasonable care in the oversight of corporate affairs and management with respect to the operations of Liberty Medical and by acquiescing in alleged misconduct by Liberty Medical. The consolidated complaint, filed on December 17, 2001, names as defendants PolyMedica, Steven J. Lee, Arthur A. Siciliano, President of PolyMedica, Eric G. Walters, and five members of PolyMedica’s Board of Directors: Herbert A. Denton, Thomas S. Soltys, Frank Logerfo, Marcia J. Hooper, and Daniel S. Bernstein. Defendants’ motion to dismiss the consolidated complaint was denied on July 16, 2002. On September 16, 2002, the Court granted defendants’ motions to report the case to the Appeals Court and stay the proceedings, but denied defendants’ motion to reconsider its denial of the motion to dismiss. On January 23, 2003, the Appeals Court docketed the case under the caption Roberta Casden v. Daniel S. Bernstein and others, No. 2003-P-0107. The case is currently stayed by the Appeals Court until November 4, 2003.

     On July 1, 2003, the Appeals Court granted a motion to remand the proceedings to Middlesex Superior Court for purposes of approving a potential settlement. A settlement agreement has been filed with the Superior Court, and recites certain corporate governance changes we have made and enhancements to our compliance functions. Pursuant to this agreement, PolyMedica denied all liability and the factual allegations in the complaint and has agreed to pay only plaintiffs’ attorneys’ fees and expenses in an amount to be determined by the Court and notice costs. PolyMedica will seek and expects to receive reimbursement of such attorneys’ fees from its insurer. The settlement is subject to approval by the Middlesex Superior Court. We can provide no assurance that the settlement will be approved by the Court. The defendants believe they have meritorious defenses to the claims made in the consolidated complaint and if the settlement is not approved, intend to contest the claims vigorously.

     –           Litigation Relative to Direct Response Advertising. In July and August 2003, new lawsuits alleging violations of certain sections and rules of the Exchange Act were filed concerning PolyMedica’s accounting treatment of advertising costs. In addition to PolyMedica, Steven J. Lee, Samuel L. Shanaman, Interim Chief Executive Officer and Lead Director, Arthur A. Siciliano, John K.P. Stone, III, General Counsel and Senior Vice President, Stephen C. Farrell, Senior Vice President and Chief Financial Officer, Eric Walters and Warren K. Trowbridge were named as defendants in these lawsuits. The first complaint, Sved v. PolyMedica Corp., Civ. Act. No. 03-11270-RCL was filed July 3, 2003. Similar complaints, Gourdji v. PolyMedica Corp., Civ. Act. No. 03-CV-11393, and Thompson v. PolyMedica Corp., Civ. Act. No. 03-CV-11604 were filed in U.S. District Court for the District of Massachusetts on July 24, 2003 and August 27, 2003, respectively.

     Following our announcement on September 4, 2003 that we had concluded our discussions with the SEC concerning our capitalization of advertising costs under the direct-response advertising exception in SOP 93-7 and would not restate our historical financial statements, the parties filed, on September 23, 2003, a stipulated motion to dismiss, with prejudice, the Thompson complaint, and the Court granted the motion on September 25, 2003. On October 16, 2003, the parties filed a further motion and stipulation for order of dismissal without prejudice with respect to the remaining shareholder litigation pending in the U.S. District Court for the District of Massachusetts concerning PolyMedica’s accounting treatment of advertising costs. The court granted the motion on

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October 23, 2003.

     If any of these investigations or legal proceedings referred to above results in a determination that we have failed to comply with the statutes or regulations governing Medicare reimbursement or financial reporting or have otherwise committed healthcare fraud or securities law violations, we could be subject to delays or loss of reimbursement, substantial fines or penalties, and other sanctions (including exclusion from Medicare and other federal healthcare program participation). We cannot accurately predict the outcome of these proceedings at this time, and have therefore not recorded any charges relating to these proceedings. An unfavorable outcome could have a material effect on our financial position and results of operations.

     In addition to those described above, we have certain contingent liabilities, including but not limited to, litigation that arises in the ordinary course of business. We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

9.

Segment Information

     Our reportable segments are strategic business units or divisions that offer different products. These units have separate financial information that is evaluated by senior management. The segments are as follows:

     Liberty Diabetes – Through our Liberty Diabetes segment, we provide diabetes testing supplies and related products to customers suffering from diabetes and related chronic diseases. We offer a wide array of diabetes supplies from a broad range of manufacturers.

     Liberty Respiratory – Through our Liberty Respiratory segment, we provide prescription respiratory medications and supplies to customers suffering from chronic obstructive pulmonary disease (“COPD”).

     Pharmaceuticals – Through our Pharmaceuticals segment, we provide prescription oral medications not covered by Medicare directly to existing Liberty Medical customers and sell prescription urology and suppository products, over-the-counter female urinary discomfort products, and home medical diagnostic kits.

     Selling, general and administrative expenses attributable to PolyMedica’s corporate headquarters are allocated to the operating segments according to the segment’s relative percentage of total revenue. Selling, general and administrative expenses incurred by Liberty Diabetes that were incurred on behalf of all Florida businesses for shared services, are allocated to the operating segments primarily in accordance with the segment’s relative percentage of total employees. However, segment assets belonging to PolyMedica’s corporate headquarters, which included $33.88 million and $17.40 million of cash, cash equivalents and investments as of September 30 and March 31, 2003, respectively, are not allocated as they are considered separately for management evaluation purposes. As a result of these allocations and the start-up nature of some of the businesses included in our Liberty Diabetes and Pharmaceuticals segments, the segment information may not be indicative of the financial position or results of operations that would have been achieved had these segments operated as unaffiliated entities. The depreciation and amortization amounts below include amortization of direct-response advertising. We do not organize our units geographically, as our products are sold throughout the United States only. There are no intersegment sales for the periods presented. Information concerning the operations in these reportable segments, restated to reflect the way we currently segment our business, is as follows:

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     Selling, general and administrative expenses attributable to PolyMedica’s corporate headquarters decreased $2.21 million and $2.00 million in the three and six months ended September 30, 2003, as compared with the three and six months ended September 30, 2002, respectively. Income before Income Taxes for our Liberty Respiratory segment for both the three and six months ended September 30, 2002, included a $2.22 million benefit for the reduction of accrued amounts due to Medicare and others, as discussed in Note 7.

10.

Accounting for Stock-Based Compensation

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As provided for in SFAS No. 123, we have elected to apply Accounting Principles Board (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for our stock-based compensation plans. SFAS No. 123 defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. APB No. 25 does not require employee options to be expensed when granted with an exercise price equal to fair market value, provided other criteria are met.

The following is a reconciliation of net income per weighted average share had we adopted SFAS No. 123:

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     The fair value of each option granted during fiscal 2004 and fiscal 2003 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

11.

Income Before Cumulative Effect of Change in Accounting Principle per Share

     Calculations of income before cumulative effect of change in accounting principle, referring to the April 1, 2002 adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” discussed in Note 4, per weighted average share are as follows: